FOR MANY AMERICANS, retirement translates into freedom: You're finally free from the "daily grind." You finally have all the time you want to relax, travel, visit with friends and relatives, or pursue hobbies such as golfing, gardening, reading, or sewing. You might even start a new career. At last, your time belongs to you and you alone.

But the thought of retirement can also be stressful. The realization that you're not going to a job every day can create perceptions of uselessness, isolation, and lack of worth. The thought of having to live without the familiar, regular paycheck also can produce financial stress and penny-pinching. How do you reduce that stress? It all boils down to this: You can reduce or even eliminate the anxiety through self-education and financial planning.

In many ways, plotting your financial future will be even more important once you retire than when you were working. In fact, you will find that the only thing that doesn't change with retirement will be your need to continue financial planning.

Additionally, you are going to travel into the future and get a peek at what retirement can look like, the costs you'll most likely face, and the financial strategies you'll need to deal with them. Once you have a picture of your financial needs, you'll have a much clearer idea of how big a retirement nest egg you really need to build.

Be Ready for the Economic Challenges of Retirement

You can't make your plans today, cast them in cement, and hope they will still be useful when you do retire. Flexibility is essential for your retirement planning. In other words, you must make plans today—and be prepared to modify them, again and again, as retirement draws near.

What could make you modify your retirement plans? Well, a worsening of the inflation rate would certainly be a factor. If you don't plan for it, inflation could be your biggest financial enemy in your retirement years. Why? Because inflation erodes the marketable value of your personal property, raises living costs, and shrinks the value of the dollars you already have.

These problems will be compounded in the future for you because annual cost-of-living increases awarded to recipients of Social Security benefits may lag behind the true increase in the cost of housing, food, energy, and other items. What's worse, most private pension plans provide no yearly increase.

Taking responsibility for your financial future will be even more important in your retirement years because the Social Security and Medicare systems face an uncertain future. Although some form of government assistance for senior citizens is sure to be around, pressures for reduced federal spending and for lower taxes may limit the amount of help these programs can provide. As a result, retirees have been forced to shoulder more of their own living costs. Federal expenditures for related social programs, such as government housing for the elderly, have also been reduced. Even deeper cuts may lie ahead.

Prepare Ahead for a Possible Social Security Gap

The Social Security system is also facing financial problems brought on by population trends. The so-called "Baby Boomers," who pay the Social Security taxes that provide benefits for today's recipients, are having fewer children, and that means fewer workers to fund the system several years from now. Also, most Baby Boomers are only 10 or so years away from retirement age; the system will likely need to be radically revamped well before they get there. Even the happy fact that today's retirees are living longer has a downside—the Social Security system must support them longer.

For all the negative talk, the Social Security system is far from insolvent. The program will start paying out more than it receives in 2012, when Baby Boomers start retiring, but there's enough in Social Security trust funds to make up the shortfall for at least 20 years. You can expect Congress to take another broad look at Social Security before long—with some major changes in the system nearly certain. For instance, Social Security benefits could be cut to wealthier individuals. The normal retirement age—already being raised from 65 to 67 (depending on the year you were born)—could be raised again.

There also have been proposals to allow workers to invest part of their Social Security taxes in private retirement accounts.

For now, you can count on Social Security paying for at least part of retirement. But be prepared to see your potential Social Security benefit reduced in the years to come, as Congress tries to make it stretch to cover everyone it must cover.

Prepare Ahead for a Possible Medicare Gap

Meanwhile, the government-sponsored Medicare system simply isn't living up to its promise. Most retirees who must draw on this system are forced to pay hundreds or thousands of dollars a year because the services they receive aren't fully reimbursed by the federal government. So-called "Medigap" insurance polices—private plans designed to reimburse retirees for some of the medical expenses they incur that aren't covered by Medicare insurance—don't entirely fill the void left by the federal insurance program and are often too expensive for elderly people to afford.

When it comes to Medicare, you'll want to keep your retirement planning flexible so you can bolster whatever help the government provides with Medigap coverage of your own.

Prepare Ahead For A Possible Retirement Savings Gap

Finally, many retirees face the prospect of "outliving" their retirement income. If you must dig into your cash reserves to supplement your income, your retirement nest egg will gradually disappear because your withdrawals exceed what you earn on the reserves.

The answer is to invest your money wisely—taking reasonable, but not excessive, risks to keep your retirement nest egg growing. The answer, furthermore, involves managing your money so you keep a lid on spending, and keep saving all that you should to retire in style.

Fortunately, your retirement years don't have to be years of financial hardship. You can be free of financial worries if you analyze, ahead of time, your financial status, maximize income and control expenses, and make solid investments while safeguarding your current assets. The trick is to set goals for the future, and then meeting those goals. You'll find those goals falling into two broad categories—lifestyle goals and financial goals. Your ability to meet one set of these goals will, to a large extent, depend on your ability to achieve the other.

MONEY TIP

The key to successful retirement planning is keeping all five steps in mind. You don't just want to make financial plans, you always want to make lifestyle plans. You don't want to see retirement as the end—but as a new beginning that could let you launch that second career you have always wanted to try.﻿

BONUS TIP

Don't Overexercise Your Retirement Savings Plans

THE GOOD NEWS, when it comes to saving for retirement, is that money in your retirement savings plans builds up free of income taxes until the money is withdrawn.

Each time you sell an investment outside of a tax investment account, there is an immediate tax liability to be calculated--either a capital gain or a capital loss.

There is no comparable liability to be calculated when the investment is in a tax-deferred retirement savings account. You could sell every investment you own and never have to think about running up a tax bill.

That makes your tax life simpler. Unfortunately, it can quickly lead to "shoot-from-the-hip" investing. You can buy and sell investments anytime you want. And studies show that people are more apt to buy and sell on a whim from within a tax-sheltered account, than from within a taxable account.